How Does a Reverse Mortgage Loan Work?
By: Kelly South
February 5, 2023 • 3 minute read
How Does a Reverse Mortgage Loan Work?
A reverse mortgage can be a powerful financial tool that can be used to both offset costs and increase cash flow in your retirement.
Since a reverse mortgage is a product that isn’t available to homeowners until they are at least 62 years old, there isn’t a lot of familiarity with what it is and how it works.
While it is a loan just like a traditional mortgage, the way it works is very different.
Find out what a reverse mortgage is, how it works, and how to know if a reverse mortgage is right for you.
What is a Reverse Mortgage?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM).
A HECM reverse mortgage allows homeowners to convert their home equity into cash.
It provides senior homeowners who are equity-rich with a way to access the equity they’ve built up without having to make monthly payments.
Alternatively, homeowners could take out a Home Equity Loan or a Home Equity Line of Credit (HELOC). But both options require monthly payments to pay them back.
Since many in retirement live on fixed incomes, taking on a monthly payment may not be feasible.
Reverse mortgage borrowers not only eliminate monthly mortgage payments but also receive money to use as they wish.
How Does a Reverse Mortgage Work?
When someone takes out a reverse mortgage, the first thing it does is pay off the original mortgage, if there still is one.
Next, the homeowners will start receiving their money. They have the option to receive it as a lump sum, fixed monthly payments, a growing line of credit, or a combination of the three.
Instead of making monthly mortgage payments to pay back the loan like you would with a traditional mortgage, the lender pays you, and the mortgage does not need to be paid back as long as you remain in the home.
How Do You Qualify for a Reverse Mortgage?
A reverse mortgage is typically only available to homeowners who are 62 years of age and older. (Although, there are some cases in which lenders will have loans available to those as young as 55 years of age.)
To qualify, the home must be the homeowners’ primary residence. The home must be in good condition.
Homeowners pay back the loan when they leave the home. This may happen because they decide to sell or the homeowners passes, in which the home is subsequently sold.
The Reverse Mortgage Application Process
While the application process may vary depending on the lender, here is a general overview of what you can expect.
Step 1: Apply. In this step, the lender will begin working on your application. The lender will typically be able to tell you what you can expect for loan amounts, fees, and interest rates.
Step 2: Counseling. In most cases, an application cannot be officially filed until the homeowners complete a counseling session. This is done with a third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). The purpose of the counseling session is to explain the benefits and risks of a reverse mortgage. Once completed, the homeowners will receive a certificate they will submit to the lender.
Step 3: Appraisal. Homeowners will need to obtain an appraisal of their home to assess the condition of the home and the current market value.
Step 4: Underwriting. Underwriting will process the application, appraisal, and all relevant documents. Once the application has been approved, it will be moved to closing.
Step 5: Closing. A closing date will be set, and all documents will be signed. This will be done through a notary or an attorney who will oversee the signing of the documents.
Step 6: Receive funds. There is a waiting period that lasts for three business days in which borrowers are allowed to cancel the reverse mortgage. Once this waiting period is over, the homeowners can receive their funds.
One thing to note about applying for a reverse mortgage is that it is not a fast process. The entire reverse mortgage application process can take up to 45 days.
If a reverse mortgage is something you think may be a good option for you, it may be worth getting the application process started for this reason.
If you decide to change your mind, applicants can cancel at any time — even three business days after signing the closing loan documents.
Is a Reverse Mortgage Right for You?
A reverse mortgage may be what you need to round out your retirement portfolio.
If you meet the requirements above and you find that your retirement income isn’t enough to cover your costs, pay for home renovations, or you simply want to have additional funds to cover unplanned expenses, it may be worth considering a reverse mortgage.
If you are interested in pursuing a reverse mortgage, check out our list of recommended reverse mortgage lenders.
Sources:
https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou
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